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The Three Big C’s: Commodities, Canary, China

Economists and analysts and politicians are telling us how good it is that commodity prices have fallen. Get your oil while it’s cheap says our president. Yes it’s great that things are cheap I agree but why dear God why are they so cheap? What has changed? Let me put it this way…

If the world was a coal mine, these guys would all die with the canary. They see an effect but no cause. When the canary stops chirping these guys say “Oh how wonderful. It’s so nice and quiet.” They don’t ask the question why is the canary dead? They don’t ask why are commodity prices are falling?

Yes, why are commodity prices falling? There a few obvious factors such as a stronger dollar and falling demand. The world economy is slowing down due to generational patterns in the developing world as a result of WWII. Yes we still feel the effects of WWII today. When you wipe out tens of millions of people in just a few years time which is quickly followed by the largest burst in population in the history of the world, you tend to get some lingering generational effects. But it’s not just developed countries that are slowing down.

China, the world engine, has been preparing for a hard landing for the past decade. Some how they’ve managed to scoop enough water out of the boat to keep it from sinking. But there is a cost. As I predicted in my first post back in December of 2013, that China would slow down and although we wouldn’t get accurate data from the Chinese themselves we only have to look at what’s going on with their trade partners and the commodities they consume.

First thing’s first, commodities are falling like it’s the second great recession. Oil wasn’t the only commodity to lose half it’s value in a year. Iron ore suffered the same fate as well. Copper is in the tubes and still falling. So what about China’s trading partners? Well Australia and Canada aren’t doing too well. Weak demand for the commodities they export is starting to hurt their economies. So what do they do? Well they devalue their currency to make their exports more competitive. But China isn’t doing that. China has it’s yuan pegged to the dollar. So when the dollar strengthens so too does the Yuan. A strong Yuan hurts chinese exports which causes a slowdown in their economy which in turn hurts their trade partners who devalue their currencies which once again reinforces a strong Yuan. How long does this go on for? Does China devalue the Yuan? These are questions for another time, but I doubt the SNB will be the only group of unelected bureaucrats to go back on their promise.